What is rental yield?
If you’ve been looking into property investment, chances are you’ve come across the term “rental yield”. As an investor, it is an important concept to understand in order to assess the potential income and cash flow of an investment property.
Basically when it comes to yield there are two types: gross yield and net yield.
Gross yield is everything before expenses.
It is calculated as a percentage based on the property’s cost or market value divided by the income generated by the property.
Example: Calculating gross rental yield
Sam purchases an investment unit for $400,000. He decides to charge $350 per week in rent.
The gross rental yield on Sam’s unit is: ($350 x 52) = $18,200 ÷ $400,000 x 100 = 4.55%
Net yield is everything including expenses.
Net rental yield also takes into account the ongoing expenses of your property, including things such as mortgage interest repayments, strata levies, management fees and council rates.
Example: Calculating net rental yield
In Sam’s case, his annual expenses add up to $4,200.
The net rental yield is: ($350 x 52) = $18,200 – $4,200 = $14,000 ÷ $400,000 x 100 = 3.5%
Which figure should you look at?
When researching investment properties you’re likely to see gross rental yields published as part of suburb profiles. While these may serve as a guide, it’s also useful to have a clear understanding of your investment property costs, or net rental yield. This is because these costs may affect the return on a property.
For example, if an investment unit is in a complex with high strata fees, that unit’s net rental yield may actually end up lower than a unit offering a less impressive gross rental yield but smaller annual expenses.
How important is rental yield?
Gross and especially net rental yield can both be useful figures for determining the potential value of and return on your investment property. But it’s important to consider as a part of a broad suite of factors, including location and condition of the property as well as capital growth.
Bigger isn’t always better
Maximising your rental yield shouldn’t necessarily be a key goal of buying property – it really depends on what role you want the property to play within your investment portfolio. It may be in your interests to keep your investment property’s yield lower – if you plan on negatively gearing it, for example.
There are several factors to consider when investing in property depending on your unique situation and your goals. Successful Ways Mortgage Brokers can answer any questions you might have about property investing and advise which strategy is best for your situation.
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